The foreclosure crisis has saddled plenty of lenders with homes they never wanted to own. As usual,
The government-controlled mortgage financiers now own more than one in every nine foreclosed properties, according to data provider RealtyTrac and the companies' recent regulatory filings.
Rick Sharga, vice president of RealtyTrac, says it's inevitable that Fannie Mae and Freddie Mac will have to seize more properties. "While neither company had a large holding of subprime loans, the next wave of foreclosure activity, driven by unemployment, will include more of the loan types that both GSEs specialize in--30-year, fixed, prime conforming loans," he said.
This is great news for down-on-their-luck borrowers--Fannie and Freddie are eager to help with modifications or short-term loans--but bad news for taxpayers. That's because managing foreclosed properties is basically about losing as little money as possible. Since their sole mission is to help stabilize the troubled housing market; these two are likely to be losing more than any profit-making enterprise could stomach.
In what could be a stroke of genius or a costly quagmire, the two government-sponsored enterprises launched programs during the quarter to keep broke borrowers in their former homes, allowing them to rent at market rates after their property has been seized. While Freddie will let former owners or tenants stick around, Fannie will only let renters stay put and the foreclosed home is kept on the market. Fannie estimates there are approximately 1,800 units eligible for the program; hundreds of lease applications are in-process, according to spokeswoman Amy Bonitatibus. Freddie declined to comment on how many renters it currently has or expects to have.
But being a landlord is a tough business. Especially when you have very little say in who your tenant is. "It sounds good, but it ignores that there's upkeep and a whole lot of issues involved," said Guy Cecala, publisher of Inside Mortgage Finance. "In some areas rent won't even cover taxes."
In the best case, by seizing homes, Fannie and Freddie will turn non-performing loans into cash-producing assets and maintain their properties' value until the market mends. Or it will end up costing taxpayers a bundle if Fannie and Freddie's foray into being landlords goes south. A side effect of a growing rental program could be fewer foreclosure listings, at least for Freddie, because this pulls homes off the market. Both companies have said they are eager to grow their rental programs.
Underreporting their brick and mortar holdings, or simply releasing their inventory in a controlled manner, has another benefit for the larger market because it softens the impact that a flood of extra homes would have on home prices. "It may be better for the housing market--and therefore the GSE loan portfolios," said RealtyTrac's Sharga.
But Cecala says that servicers and lenders tell him the GSEs are unloading some properties in declining markets at fire-sale prices. "I've been hearing Fannie Mae has been selling [foreclosed properties] for $5,000 in some areas," he said. "It's not that they've gotten a lot of better at selling these properties; they've just lowered their expectations."
Meanwhile, both companies ramped up loan modifications during the quarter: Freddie inked deals to ease terms on 24,623 mortgages, up from 4,246 a year earlier; Freddie completed 23,000 workouts, compared with 1,500 the year before.
Freddie also took a voluntary hit of $2 billion buying loans. Why volunteer for pain? So mortgages can be modified and people can live in their homes, says Freddie Mac spokesman Michael Cosgrove.
Fannie spends a similar $2.6 billion buying loans but doesn't consider it a loss. "A certain portion of these loans will cure over time," said Fannie's Amy Bonitatibus. Both companies have said that their modification efforts will end up hurting their bottom line and trigger more cash infusions from Treasury.